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US Yields are Rising Again - So Why Isn't the US Dollar?

US Yields are Rising Again - So Why Isn't the US Dollar?

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- DXY Index has decoupled from US yields in recent weeks - why?

- USD/CAD tends to lead USD-pairs...if it breaks below 1.3000, watch out for a flush in DXY Index.

- Get the DailyFX Trading Guides for our 2017 Trades of the Year and Q1'17 FX forecasts.

Webinar Schedule for Week of January 29 to February 3, 2017

Monday, 7:30 EST/12:30 GMT: FX Week Ahead: Strategy for Major Event Risk

Wednesday, 7:30 EST/12:30 GMT: Trading Q&A

Thursday, 7:30 EST/12:30 GMT: Central Bank Weekly

With the US Dollar surging forward in the final two months of the year, annualized US GDP in Q4’16 is expected to fall from the prior quarter’s estimate of +3.5% to +2.2%, in part due to trade balance adjustments. However, the consensus estimate provided by Bloomberg News may be discounted; the Atlanta Fed GDPNow forecast sees last quarter’s growth at +2.8%. Regardless, either outcome would point to a slowed pace of growth in the world’s largest economy, further highlighting the need for expansive fiscal reform.

Seeing as how the US Dollar’s strength since November was built on the prospect of future policy changes – not so much that data was coming in better than expected – there may be less of an impact here than usual. Indeed, this last point appears to be the reason why the US Dollar has decoupled from short-term US yields over the last few weeks: the lack of clarity about fiscal policy changes has taken the "Trump reflation trade" off the tracks.

See the above video for a discussion on why US yields have decoupled from the US Dollar, how that relationship could emerge again, as well as for technical considerations and specific levels of importance in DXY Index, EUR/USD, GBP/USD, USD/JPY, AUD/JPY, CAD/JPY, and CAD/JPY.

Read more: Mexican Peso Slumps After Trump Threatens No Show

--- Written by Christopher Vecchio, Senior Currency Strategist

Follow him on Twitter at @CVecchioFX

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